Hospital outpatient PPS evolving slowly - prospective payment system

Healthcare Financial Management, April, 1999 by Paul L. Grimaldi

The final rule for Medicare's hospital outpatient prospective payment system (PPS) has yet to be issued, but HCFA continues to collect comments and hone specific provisions of the rule. Therefore, hospitals need to prepare to manage effectively under the new system by examining how the payment rates will be calculated and considering possible scenarios regarding how certain organizational issues may be resolved.

Payment Rates

The ambulatory payment classification (APC) system currently consists of 346 groups of significant surgical and nonsurgical procedures, medical visits to clinics and emergency departments, and ancillary services. The proposed rule contains preliminary standard national APC payment rates and the corresponding standard national Medicare coinsurance amounts. Many APC rates are below $200, and a handful exceed $1,500. Regardless of the rate, the labor-related portion of each standard rate, which comprises 60 percent of the total rate, must be adjusted by the hospital's inpatient PPS wage index to compute the wage-adjusted APC rate. The wage-adjusted rates are used to determine the amounts Medicare and the patient each owe the hospital.

To illustrate, assume a standard APC rate of $401.60, a wage index of 1.041, a standard coinsurance amount of $185.36, and a Medicare program percentage (expressed as a decimal) of 0.5384 (calculated from the equation 1.00-$185.36/$401.60). As shown in Exhibit 1, if the patient meets the Part B deductible of $100, Medicare would pay $221.54 of the wage-adjusted APC rate of $411.48 and the patient would owe $189.94. If none of the deductible were satisfied, Medicare would pay $167.71, and the patient would be liable for $343.77.

The APC service (case-mix) index varies widely by hospital, from under 1.0 to more than 4.0. The new payment system, therefore, has the potential to noticeably redistribute Medicare outpatient payments among hospitals.

Beneficiary Coinsurance

The beneficiary coinsurance amount typically will exceed 20 percent of the APC rate, often by a wide margin. The excess amount stems from past Medicare payment policies coupled with the formulas underlying the APC rates. The new coinsurance amounts will be frozen and gradually reduced to 20 percent, the percentage patients pay for other Part B services.

The final rule may permit hospitals to reduce the Medicare coinsurance amount for certain or all APCs to no lower than 20 percent of the corresponding rate. Any reductions would be effective for one year, and the hospital may be allowed to advertise the lower rates. The before-reduction coinsurance amounts, however, may be significantly lower than the amounts collected currently. Also, the reductions likely will not translate immediately into lower out-of-pocket payments for the typical Medicare patient, but instead result in lower payments from supplemental medical insurers.

Five Unresolved Issues

The proposed rule solicited comments about the hospital outpatient PPS. The comments raised several as-yet-unresolved issues, including scope of packaged services, partial-hospitalization programs, coding of medical visits, volume controls, and hospital-based entities.

Scope of packaged services. Numerous outpatient services and items (eg, operating and recovery room time, medical and surgical supplies, and pharmaceuticals) will be packaged into the APCs, and Medicare will pay a combined amount for bundled services. Other outpatient services and items will form their own APCs, and Medicare will pay an APC rate for each medically necessary service or item. Still other outpatient services and items, such as certain clinical diagnostic laboratory services, will continue to be paid on a fee-schedule basis.

Partial-hospitalization programs. The APC unit of payment for partial-hospitalization programs would be a day of care rather than a service. At issue is whether to establish minimum and maximum levels of service for a typical partial-hospitalization day, as well as a distinct APC for half-day partial hospitalizations.

Coding of medical visits. HCPCS codes will be used to determine APCs and payment amounts. Still unsettled is whether CPT codes, ICD-9 diagnosis codes, or a combination of the two would apply to clinic and emergency department visits. Use of ICD-9 codes likely would be helpful in packaging additional services together. Furthermore, the final rule will contain new codes and coding requirements in addition to those already contained in the proposed rule.

Volume controls. The method to cap Medicare payment growth must be finalized. Spending targets will be aimed at preventing Medicare from paying for unnecessary volume and intensity and volume gains attributable solely to better coding. Excess spending in one calendar year would be netted against a future rate update.

Hospital-based entities. The final rule will spell out the requirements that certain entities must meet to qualify for hospital-based status and thus for Medicare hospital outpatient payments. For example, hospital-based status likely will be denied to freestanding entities that are jointly owned by multiple hospitals.